Equity-Linked Saving Scheme (ELSS) is a tax-saving mutual fund investment option that offers the dual benefit of potential long-term wealth creation and tax deductions under section 80C of the Income Tax Act, 1961. To maximise the returns from ELSS funds while leveraging their unique features, investors need a focused strategy. Let’s delve into six golden tips specifically tailored for ELSS funds to help you unlock their potential and maximise your returns while enjoying tax savings.
- Plan for the lock-in period
ELSS funds come with a mandatory lock-in period of three years. To make the most of this period, it’s essential to align your investment horizon accordingly. Consider investing in ELSS funds with a long-term view, as you will not be able to access your money before the lock-in period is up. It’s also important to remember that equity investments tend to deliver optimal returns over extended periods anyway, so the three years lock-in period shouldn’t be a deterring factor.
- Opt for a Systematic Investment Plan (SIP) Approach
Utilising the SIP mode for investing in ELSS funds can be advantageous. It allows you to spread your investments across different market cycles, mitigating the impact of short-term market volatility. Additionally, with an SIP, you can invest smaller amounts regularly, ensuring disciplined investing and potential rupee cost averaging benefits over the lock-in period.
- Consider a multi-cap or large-cap ELSS fund
When selecting an ELSS fund, opt for those that invest across market caps, such as multi-cap or large-cap funds. These funds provide exposure to companies of varying sizes and can potentially offer a balance between growth and stability. Evaluate the fund’s track record, consistency in performance, and adherence to investment objectives to make an informed decision.
- Focus on tax planning
While ELSS funds offer tax deductions up to Rs 1.5 lakh under section 80C, it’s essential to align your investments with your overall tax planning strategy. Evaluate your tax liability and optimise your ELSS investments accordingly. Additionally, consider the tax implications of dividend payouts and capital gains from ELSS funds when making investment decisions.
- Rebalance and review
Regularly review your ELSS portfolio to ensure it aligns with your financial goals and risk tolerance. As market conditions and your personal circumstances change, rebalance your portfolio if needed. Reallocating funds based on market trends and individual fund performance can help optimise returns while maintaining a balanced asset allocation.
- Stay invested beyond the lock-in period
As mentioned earlier, ELSS funds have a lock-in period of three years. However, to fully realise the growth potential of your investments, consider staying invested beyond this period. By adopting a long-term investment approach, you can potentially enjoy the compounding effect of equities and maximise your returns. If your ELSS fund is performing well, there is no need to redeem the units after the lock-in period is over. You can continue to stay invested as long as the fund is still aligned with your overall investment strategy.
Maximising ELSS fund returns requires a focused approach that takes into account the unique features of this tax-saving mutual fund option. And with these golden tips, you can make the most of your ELSS investments and set yourself on a path towards long-term financial success. Remember to consult with a financial advisor for chalking out your broader tax planning strategy. That’s because you need to consider a couple of things, such as whether you follow the old or new tax regime, what are your other tax-saving investments, how much should you invest in ELSS for tax saving, etc.